France Telecom's Swedish bid hit

By Rudy Ruitenberg  |   2008-6-7  |     NEWSPAPER EDITION

FRANCE Telecom SA Chief Executive Officer Didier Lombard's offer to buy Sweden's TeliaSonera AB for 252.5 billion kronor (US$42 billion) has angered many investors, who said the deal would erode value.

"During the past month or so, about 90 percent of investors I talked to were aggressively against this deal," Saeed Baradar, a telecommunications sales specialist at Societe Generale SA in London, told Bloomberg News. "They could not see any financial or strategic rationale."

TeliaSonera and the Swedish government, the Nordic phone company's largest shareholder, rejected the bid from France Telecom on Thursday and said they're open to higher offers.

The merger would create Europe's biggest telephone company, boost customers by 39 percent to 237 million and save almost 700 million euros (US$1.1 billion) a year by 2013, France Telecom said.

France Telecom shares, down 26 percent this year, fell 5.1 percent in Paris trading yesterday. The unsolicited offer for the former Swedish monopoly, announced on Thursday, may continue to hurt the stock price on speculation about an increased bid, said Rob Goyens at Dexia in Brussels.

France Telecom is the worst performer among 20 stocks in the Bloomberg Europe Telecom Services Index since April 16. Shares of the Swedish company have risen 29 percent.

Citigroup Inc's London-based analysts Terence Sinclair and Michael Williams labeled the offer "a poor deal for both parties."

Mark James, of Collins Stewart in London, called it "a dreadful deal" that hurt the credibility of France Telecom executives.

While Chief Financial Officer Gervais Pellissier said last year that "major consolidation" in Europe wasn't on the agenda, the 66-year-old Lombard said on Thursday that France Telecom needs to strengthen its negotiating power with suppliers, cut costs and fend off competition from the likes of Google Inc.

"In mature countries, operators increasingly need to achieve a critical size," Lombard said. Buying TeliaSonera would give the French firm sales of about 63 billion euros, vaulting it ahead of Deutsche Telekom AG and Telefonica SA.

"France Telecom is pursuing scale at the expense of any value creation," James wrote in a note. "Management credibility has been dented."

France Telecom has been focused on emerging markets in the past year. Lombard visited Vietnam in August and September to discuss buying a mobile operator there, and in January said talks to buy a stake in Ghana Telecommunications Co continued.

In November, the company agreed to pay US$390 million for a 51-percent stake in Telkom Kenya and won a license to provide telecommunication services in Niger.